Consumer Duty centre stage: Lessons from the FCA’s second Enforcement Watch publication

The FCA has published its second Enforcement Watch publication, building on its first edition to publicise ongoing enforcement activity and educate the market about areas of concern. This new edition focuses specifically on FCA work to enforce its expectations of firms under the Consumer Duty.

The decision to focus on the Duty is understandable. The FCA has consistently identified preventing consumer harm as a top strategic priority and its Co-Heads of Enforcement, Therese Chambers and Steve Smart, are clear that this is where enforcement should focus.

Given that the Duty is both relatively new and outcomes-focused (leaving firms significant discretion over how they comply) guidance on the conduct the FCA is questioning is especially valuable. Much of the FCA’s early Duty work has favoured supervisory interventions over full investigations; this edition of Enforcement Watch sheds light on both, including the circumstances in which supervisory engagement has tipped into enforcement.

Key take-aways

• Comply or exit: The FCA is successfully using the Duty to remove poor actors from the market. In several cases, FCA intervention — typically business restrictions to prevent future harm — has prompted firms to cancel their permissions and exit the market.

• Skilled Person Reviews are a popular tool: The FCA has commissioned 30 reports into Consumer Duty compliance concerns. It regards these as a valuable diagnostic tool: they can uncover the root causes of problems and provide a basis for remediation without consuming FCA resource. Their significance should not be underestimated — where cases do progress to enforcement, the FCA is increasingly willing to build its investigation on the earlier findings of a Skilled Person.

• Fair value remains the ‘hottest topic’: Investigations into fair value continue to predominate. For most firms, value assessments were one of the genuinely new requirements under the Duty. Many have found them difficult to operate in practice. This edition of Enforcment Watch outlines that the FCA understands value as something going beyond price, encompassing whether a product meets the needs of consumers in the target market, avoids foreseeable harm, and avoids frustrating customer objectives. A product that fails on any of these grounds is unlikely to be regarded as fair value, regardless of price. Any firm that knowingly sells such a product will not be acting in good faith. Firms should look to develop fluency in articulating a broader, holistic view of what their products offer consumers — the cross-cutting rules matter as much as the price and value outcome rules here.

• Other areas of concern: Beyond fair value, the FCA has taken supervisory action on conflicts of interest, client categorisation, influence over outcomes across the distribution chain, vulnerable customer support, misleading financial promotions, customer bias exploitation, and poor monitoring. Sectors in the spotlight include insurance, wealth, fund managers, claims management, and CFD platforms. Many of these sectors and topics had already been flagged by the FCA as potential concerns: earlier portfolio letters pointed out weaknesses in the identification of vulnerable customers in the wealth sector; the FCA has recently published its multi-firm review of CFD firms' delivery of the Price and Value outcome.

• When will the FCA investigate? Open investigations into possible Consumer Duty breaches have risen from six to 11 since January, spanning insurance, pensions, wealth, peer-to-peer lending, and claims management. The FCA says it will investigate where it has detected serious misconduct, where investigation is proportionate and necessary, and where it is likely to create meaningful deterrence. In several cases, the FCA has intervened to prevent future harm but is still investigating whether serious misconduct occurred in the past. In another, the FCA is examining whether an insurer deliberately hollowed out product features. Positioned as a ‘full examination’ of the practice, the FCA considers that, if it produces a published outcome, this would  raise awareness of the FCA’s expectations here and deter others. This is a clear signal of the factors that might tip supervisory engagement into enforcement.

• One Duty — many possible ways to fail. The four outcomes rules give the FCA broad scope to examine products across a range of metrics, including: was the product was designed with its target market in mind; does it meets customer needs and offers value; are its features communicated clearly; and, when things go wrong, does the firm provide adequate support? This edition of Enforcement Watch demonstrates that firms need to be able to answer these questions with confidence, because the FCA is watching and ready to intervene.